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Insurance Regulatory Update - May 2016

CENTRAL BANK PUBLISHES RESEARCH ON CONSUMER PERCEPTIONS OF COMPLAINT HANDLING IN REGULATED FIRMS

On 11 May, the Central Bank published research on consumer perception of complaints handling in regulated firms. The main findings of this research were: a low number of respondents felt fairly treated during the complaints process; satisfaction levels on how the complaint had been handled were poor; having a named contact during the complaints process increases satisfaction levels; awareness and knowledge of the named contact also increases satisfaction levels. The Central Bank commented on the findings stating that they raised some concerns and encouraged firms to take into account the results of the research and integrate them into their complaints processes.

On 19 May, the Central Bank published the latest edition of the Intermediary Times newsletter. The newsletter discusses essential compliance and other information relevant to insurance intermediaries. Firms are reminded that they must inform the Central Bank after they change their company status under the Companies Act 2014 (e.g. to a private company limited by shares or a designated activity company). It provides updates on the findings arising out of: its inspections of retail intermediaries that have failed to submit annual returns; the findings of its thematic review of firms' procedures around the requirement not to receive or hold client assets; and its thematic review of the annuity sales process in life insurers. It also provides information on recent EU guidelines on Product Oversight and Governance, its plan to test and measure firm progress in implementing internal consumer risk management frameworks and its public consultation paper entitled "CP102: Consultation on New Methodology to calculate Funding Levies for Retail Intermediaries".

CENTRAL BANK PUBLISHED LETTER ON FORWARD LOOKING ASSESSMENT OF OWN RISKS

On 9 May, the Central Bank published a letter from the Director of Insurance Supervision to CEOs of (re)insurance undertakings concerning the 2015 Forward Looking Assessment of Own Risks (FLAOR). The Central Bank notes an improvement in submission quality compared with the 2014 FLAORs. As Solvency II is now fully in effect, the FLAOR will be replaced with the Own Risk and Solvency Assessment (ORSA) going forward. Key points arising out of the review of the 2015 FLAORs are: (i) the reports should specifically identify the material risks, whether quantifiable or not, used in determining the rationale behind the firms Overall Solvency Needs; (ii) the reports demonstrate insufficient consideration of potential future material changes in risk profile and the resultant impact on capital or own funds; (iii) reports, while meeting the minimum documentation requirements, should be concise and focused; and the temporal gap between the date of collection of the data and consideration by the Board of the report should be reduced.

On 20 May, the Central Bank updated its Solvency II Information Note 8. Originally Note 8 confirmed the Central Banks objective to comply with Set 2 of the Solvency II guidelines published by EIOPA on 1 February 2015. The purpose of the updated note is to confirm that the Central Bank is in compliance with the guidelines and to emphasize that insurers are also expected to comply.

The Central Bank has recently published Solvency II Information Note 6 which confirms the Central Bank's intention to comply with Set 1 of the guidelines on Solvency II issued by EIOPA on 1 February 2015.

On 20 May, the Central Bank of Ireland published a consultation paper on guidance for (re)insurance undertakings concerning the head of the actuarial function role. Regulation 50 of the European Union (Insurance and Reinsurance) Regulations 2015 requires (re)insurance undertakings to establish and maintain an effective actuarial function as part of their overall system of governance and the tasks of the actuarial function are further expanded in article 27 of the Commission Delegated Regulation 2015/35. The Central Bank has further produced separate requirements on the actuarial function under Solvency II. The consultation paper provides assistance on the issues which should be considered when fulfilling the requirements laid out by Regulation 50. Undertakings may adopt different practices to those set out in the guidance but where they decide to do so they must be in a position to explain their reasoning to the Central Bank upon request.

The Central Bank is calling for submissions from the (re)insurance industry with the consultation remaining open for 12 weeks from 20 May until 12 August 2016. All submissions will be available to view on the Central Bank's website.

On 25 May, Insurance Ireland publishes its new jurisdictional promotion brochure focused on the position of Ireland in the global insurance market. This brochure is of interest to insurance companies considering moving to Ireland and those advising them. It discusses the advantages of doing business in Ireland as an insurer including high living standards, a young and well educated workforce, the wide variety of industries in Ireland (pharmaceutical, technology, financial etc.) and Ireland's position within the European single market. A number of heads of large insurance companies cite Ireland's strong international focus, clear regulatory regime and flexible labour laws as reasons for doing business here. An overview of the relevant taxation rules is also provided.

EUROPEAN COMMISSION DENIES REQUEST TO POSTPONE THE APPLICABLE DATE OF THE PRIIPS REGULATION

As reported in the April edition of the Arthur Cox Insurance Regulatory Update, industry bodies, such as Insurance Europe, have raised concerns about the content of the final draft Regulatory Technical Standards (RTS) for the Key Information Document (KID) to be used under the Packaged Retail and Insurance Based Investment Products (PRIIPs) Regulation and requested a one year extension for the date of implementation of the regulation which is currently scheduled to be 31 December 2016.

On 18 May, the European Commission published a letter declining the requests to push back the applicable date. The letter sets out the measures it has taken to address the concerns of industry including putting in place actions to ensure that the RTS are adopted "before the summer" to provide industry with legal certainty of the final format of the KID and working with the European Supervisory Authorities (ESAs) to ensure additional guidance is provided quickly to industry to clarify what is required.

The letter also makes the following points in relation to the PRIIPs Regulation: derivatives for which the retail investor gains exposure to assets/underlying values that they are not acquiring would fall under the definition of a PRIIP; both manufacturers and entities advising or selling PRIIPs must draw up a KID if the PRIIP is offered for sale in the EU; there are no grandfathering provisions (i.e. exemptions for existing products) in the PRIIPs Regulations; and insurers offering multi-option insurance products must disclose the information required under the PRIIPs legislation. The European Commission, along with the ESAs, will host a technical workshop in June to prepare for the implementation of the PRIIPs regulation.

On 26 May, Insurance Europe published a technical paper which sets out in greater detail its concerns over the PRIIPs final draft RTS. Key technical concerns are highlighted and Insurance Europe are calling on the European Commission to focus their utmost attention on these issues to ensure consumers benefit from the PRIIPs KID in practice.

Some of the risks highlighted are: the ambiguity surrounding product categorisation; the onerous and disproportionate market risk methodologies used; that consumers will be confused by the inclusion of the insurance premium in several different forms throughout the KID; the performance scenarios requiring manufacturers to engage in a complex and burdensome process of running thousands of forward looking simulations; the inclusion of credit risk as a factor in the quantitative risk indicator for insurance-based investment products and the inappropriate methodologies used to calculate this risk; the mandatory inclusion of a death scenario in the performance scenarios in the final draft RTS even where this would add no value; and, that the final draft RTS provides no legal certainty on whether manufacturers must develop and publish a KID for closed businesses or not.

RESPONSE TO EIOPA CONSULTATION ON THE IDENTIFICATION AND CALIBRATION OF INFRASTRUCTURE CORPORATES

On 16 May, Insurance Europe published a position paper in response to the EIOPA Consultation Paper on the identification and calibration of infrastructure corporates. The paper focuses on the identification of infrastructure corporates in Solvency II and encourages the addition of corporate structures to the infrastructures asset class. The report also looks at the calibration of qualifying infrastructure corporates under Solvency II. Strong concerns are also raised in relation to EIOPA's intention to use a selected sample of available market data to calibrate capital requirements for infrastructure corporates. It is proposed that the capital approach of project finance should be extended to qualifying corporates. Insurance Europe suggests a number of amendments to better reflect market realities in the regulatory definition. The paper also publishes a number of responses to the questions in the consultation documents including additional comments on the consultation paper and comments on the annexes to the document.

On 24 May, Insurance Europe published its annual report for 2014/15. The report focuses on the attitude of regulators towards the insurance industry at an EU and international level with an emphasis on the risks of overregulation and resulting incoherency of regulatory framework. It is of particular interest to insurers aiming to create consumer focused products and those who wish to gain insight into new regulatory regimes. There is significant discussion of recent EU developments such as PRIIPs Regulation 2014 and the Insurance Distribution Directive 2016. The Solvency II regulatory regime is discussed in relation to pensions, changing age demographics and risk management. There are also some perspectives on novel developments in technology and their interaction with the insurance industry as well as the role of internal models for global insurers. The impact of climate change in relation to climate related illnesses and natural disasters are discussed. A running theme is the necessity of creating international common standards within the insurance industry worldwide.

PRESIDENT OF INSURANCE EUROPE CALLS FOR A GENUINE CONSUMER-CENTRIC APPROACH TO REGULATION

At Insurance Europe's 8th Annual International Insurance Conference, Insurance Europe's president raised concerns that EU legislation, whilst well-intentioned, risked overloading consumers with information due to the overlapping EU Rules put in place by the Insurance Distribution Directive, the Packaged Retail and Insurancebased Investment Products Regulation and Solvency II. He emphasises that the volume and content of disclosures in this area must be appropriate so as not to mislead or confuse consumers. He has concerns that the Solvency II risk measurements are too volatile and inaccurate and could have a detrimental effect on consumers. He suggests that policymakers should: consider removing duplication/contradiction between the different pieces of legislation; conduct consumer testing and cost benefit analysis of new regulations; and acknowledge that overly high capital requirements hurt consumers.

On 24 May, EIOPA launched its EU Wide Insurance Stress Test 2016. The purpose of the test is to obtain a clear assessment of the vulnerabilities of the European insurance sector as a whole, rather than a pass/fail test of individual insurers. The test focuses on solo undertakings rather than insurance groups and on two major market risks in particular: the prolonged low yield environment; and a negative market shock to asset prices combined with a low risk free rate. The deadline for submission of results to national competent authorities is 15 July 2016. A Q&A will be available on EIOPA's website for participating insurers. The results of the test will be disclosed this December. The press release is relevant to small and medium sized insurers who are likely to be subjects of the test.

On 2 May, Insurance Europe published a position paper commenting on EIOPA's recent advice to the European Commission on the design of PanEuropean Pension Products (PEPP). The PEPP aims to encourage people to save for retirement by providing a simple standardised cost effective retirement saving product. Insurance Europe welcomes the discussion around a PEPP but has reservations on the proposed design of the product including: the lack of consideration of key product features; the proposal not to specify the decumulation options of the PEPP; the inappropriate application of the PRIIPs Regulations to PEPPs; that the proposed `second regime' to deal with PEPPs is excessively prescriptive and will fail to fit the current market and national frameworks in place; and that a cap on costs and charges would decrease competition and ultimately hurt the consumer.

On 25 May, Insurance Europe held its 8th Annual Conference in Ireland. The theme of the conference "serving our customers in tomorrow's world" included panels on: the impact of the regulatory environment on consumers; the role of technological innovation in distribution channels; global and European financial stability; and the global economic shift towards emerging economies.

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